May 22, 2005

Why Inequality Matters

Will Wilkinson has a typically thoughtful post about income inequality that raises the age-old question: Why does inequality matter? If the rising economic tide is lifting all boats—which may or may not be the case—then who cares that Joe CEO brings home orders of magnitude more money than average Joe? Well, let's see.

The obvious rejoinder, I think, has to do with social status. Without getting too deep into the evolutionary psychology here, it's at least reasonable to assume that humans are hard-wired to want to make it to the very top. Good for attracting lots of fertile women on the savannah and all that. But not everyone can make it to the top, obviously, so the result is lots and lots of dissatisfaction among the losers. And the more inequality, the more dissatisfaction! Paul Krugman once used the example of a middle-class family in the 1950s. Say they were offered to be transplanted into the 25th income percentile in 2005. Would they take it? They'd undoubtedly have more stuff—iPods! color televisions!—but many probably wouldn't take the deal, because they'd lose their middle class status. (And hey, it's not like they could move up in today's world—workers from the 1950s were, on average, less skilled and not as intelligent as workers today. That's just how the future works.)

But hypothetical shmypothetical. More interestingly, Richard Wilkinson—whose book on the subject I've been meaning to read for ages—has shown that income inequality may well affect the health of nations. After controlling for all sorts of other variables, Wilkinson found that more unequal countries were found to have worse health outcomes. Part of this is due to other bad effects of an unequal society: more violence, lower levels of involvement in community life, lower levels of trust, and more downward discrimination. All of which are reasons in themselves to argue against inequality. But the other important thing Wilkinson found was that inequality affects the type of society we have—increased inequality shifts the balance from a society dominated by what he calls "mutually supportive relationships" to one rife with social dominance, class differentiation, rat races, the feeling that people no longer have personal control over their lives, etc. etc. As you'd imagine, this leads to a lot of undue stress, unhappiness, and poor health.

Now if this is all true, that's not necessarily an argument against increased inequality. It just matters what you value: stuff or happiness, and the relative trade-offs between the two. It also probably matters as to what kind of person you are. I'd rather have less material stuff and work less. So, it seems, would many French and German people. But I can't speak for everyone.

Speaking of health, though, there's another, argument that ought to be floated out there, though libertarians can cover their ears right about now. Increased income inequality seems to lead to lower levels of political participation, at least among the lower classes, as we'd expect. In theory, this should always be the case—if the wealthy have comparatively more resources—which includes both money and free time—they'll have comparatively more political influence. Duh. In turn, that should lead to less income redistribution by the government, and fewer government programs for the lower classes. If the poor were all dedicated voters and civic participants, Medicaid cuts would be as off-limits as Medicare cuts. But they're not, so it isn't. Meanwhile, and much more perniciously, those with more political influence will start distributing government resources towards themselves. No libertarian worth his or her salt should be happy with massive corporate subsidies, for instance, but that's the sort of thing you get when the corporate world has more political influence. Over the past 20 years, the Republican party has become less and less "free market" as it becomes more and more dominated by wealthy political participants.

The flip side here is that increased inequality can, in theory, entrench a certain class in power. There are only limited spots in government, top universities, and other positions of influence, and when the upper classes have a disproportionate amount of wealth, they're naturally going to scoop up more and more of these spots. The chance that a wealthy and not-so-bright (or talented, or skilled) person takes the place that should go to a brighter but not-so-wealthy individual goes up as inequality increases.

Of course, in all this, we've been assuming that increased inequality is compatible with higher levels of overall growth. Maybe that assumption's not true; economists ought to find out. This paper (pdf), by Huw Lloyd-Ellis of Queen's University, suggests that there's certainly reason to think inequality has an adverse effect on growth, though the research is still inconclusive. For example, there's only so much credit to go around in this small world of ours, and inequality could in theory drive less-wealthy people out of the credit market, thus depriving the economy of potentially productive borrowers and investors. It's not inconceivable that drastic inequality may produce serious market failures and screw up the whole system. Admittedly, though, this isn't a subject I'm at all familiar with, so I'll have to read up before saying anything more. I'm very curious to see what readers think about all this.